Gaizer.com Tips for Business Start-ups

Leasing equipment helps you acquire the latest equipment that otherwise would be unaffordable if purchased. Banks and finance companies may lend you money to lease equipment, or the equipment manufacturer may facilitate the financing directly. The loan term is usually tied to the term of the lease.

Leasing equipment is convenient for companies:

• Looking for flexibility to manage their tax liabilities. Leased equipment is treated as an expense on your company’s taxes.
• Wishing to keep equipment up to date. You do not have to buy new equipment once it becomes obsolete; just replace it when the lease ends.
• That want to preserve operating capital. Your cash is not tied up in buying the equipment outright.
• That do not wish to make a down payment. This helps you keep a healthy business cash flow.

Equipment leasing has some problems:

• You cannot cancel the terms; most likely, you will be required to make all the payments, even if you stopped using the equipment.
• Due to interest rates, you will pay more money over the life of the lease than purchasing the equipment outright.
• You will pay insurance on the equipment.
• Leasing is harder than financing the equipment. There is more paperwork required, such as detailed and updated financial information, how the equipment is going to be used, and complicated lease terms to negotiate.
• Equipment leasing contracts require you to maintain the equipment according to the leasing company’s specifications. When owning the equipment, you set up your own maintenance schedule.
• By leasing equipment, you cannot deduct the full cost of purchase of the equipment in the first year, under section 179 of the IRS code. You can, however, deduct the monthly expense.
• There are many transaction fees, such as UCC-1 Fees (a one-time fee) and document fees.

Types of Equipment Leases

Capital Lease: This type of lease is similar to a loan in that it allows you to consider the equipment as an asset on your balance sheet. This benefits your company because you can claim tax depreciation. With ownership, you incur the risk of the equipment becoming obsolete. A capital lease is usually good for you if you are considering a long-term use of the equipment. The lease can be as long as five years.

A lease is considered a capital lease if it meets any of the following criteria:

The ownership of the equipment is transferred to the lessee at the end of the lease term.

• The lessee has an option to purchase the equipment at the end of the term.
• The term of the lease is equal to at least 75% of the economic life of the property, except when the equipment is leased at the end of its economic life.
• The minimum lease payment is equal to at least 90% of the market value of the equipment, minus tax credits.

If your lease has a “buyout” option, you can have either a Fair Market Value (FMV) or a $1 buyout option.

The FMV option allows buying the equipment at the end of the lease for its current market value.
The $1 option allows buying the equipment for $1 at the end of the lease. However, the monthly payments are usually higher than the FMV option.

Operating Lease: If you choose this type of lease, the leasing company keeps ownership of the equipment, and you will deduct the cost of the lease from your company’s taxes as a monthly expense. Small companies prefer this lease because they are short-term (three years or less), do not tie up funds, and allow for the use of the latest equipment. The lessor provides maintenance for the equipment.